Introduction to Management Accounting

131992407.doc

INTRODUCTION TO MANAGEMENT ACCOUNTING

Topic List

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MBA Practice Manual

Branches of Accounting Objective of Management Accounting Difference between Management Accounting & Financial Accounting Management Process Management Accounting and Ethics

Introduction to Management Accounting

131992407.doc

INTRODUCTION TO MANAGEMENT ACCOUNTING

ACCOUNTING The word Accountancy (British English) or Accounting (American English) is the process of maintaining, auditing, and processing financial information for business purposes. There are main three branches of accounting; 1. FINANCIAL ACCOUNTING Financial Accountancy (or Financial Accounting) is the branch of accounting concerned with the preparation of financial statements for outsider use. 2. COST ACCOUNTING Cost accounting is the process of tracking, recording and analyzing costs associated with the activity of an organization, where cost is defined as 'required time or resources'. Costs are measured in units of currency by convention. A currency is a unit of exchange, facilitating the transfer of goods and services. It is a form of money, where money is defined as a medium of exchange rather than e.g. a store of value. A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate trade between currency zones, there are exchange rates i.e. prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. 3. MANAGEMENT ACCOUNTING Management accounting is concerned with the provision and use of accounting information to managers within organizations, to facilitate the managers in their decision making and management control functions. Unlike financial accountancy information (which, for the most part, is made publicly available), management accounting information is used within an organization and is usually confidential. TRADITIONAL VS INNOVATIVE MANAGEMENT ACCOUNTING The distinction between traditional and innovative management accounting practices can be illustrated by reference to cost control techniques. Traditionally, 2
MBA Practice Manual

Introduction to Management Accounting

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management accountants principal cost control technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innovative techniques such as lifecycle costing and activity-based costing, which are designed with specific aspects of the modern business environment in mind. Lifecycle costing recognizes that managers ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i.e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product. Activity-based costing recognizes that, in modern factories, most manufacturing costs are determined by the amount of activities (e.g., the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials. ACCOUNTING INFORMATION SYSTEM The accounting information system within an organization has two major subsystems: 1. 2. A Management Accounting System A Financial Accounting System

Two accounting systems differ in their objectives, the nature of their inputs, and the type of processes used to transform inputs into outputs. 1. FINANCIAL ACCOUNTING INFORMATION SYSTEM The financial accounting information system is primarily concerned with producing outputs for external users. It uses well-specified economic events as inputs and processes that meet certain rules and conventions. For financial accounting, the nature of the inputs and the rules and conventions governing processes are defined by the Securities and Exchange Commission and the Financial Accounting Standard Board. The overall objective is the preparation of external reports (financial statements) for investors, creditors, government agencies, and other outside users. This information is used for such things as investment decisions, stewardship evaluation, monitoring activity, and regulatory measures.

MBA Practice Manual

Introduction to Management Accounting

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2.

MANAGEMENT ACCOUNTING INFORMATION SYSTEM The management accounting system produces information for internal users, such as managers, executives, and workers. Thus management accounting could be properly called internal accounting, and financial accounting could be called external accounting. specifically, management accounting identifies, collects, measures, classifies, and reports information that is useful to internal users in planning, controlling, and decision making.

MAJOR OBJECTIVE OF MANAGEMENT ACCOUNTING The major objective of management accounting is to serve management by providing information for decision making. MANAGEMENT PROCESS In addition to the major objective, feedback information is required for controlling the implementation of the decisions. To be aware of the information needs of management, you must first understand the management function that accounting serves. Management consists of the following five functions: 1. Planning Planning is the ongoing process of developing the business mission and objectives and determining how they will be accomplished. Planning includes both the broadest view of the organization, e.g., its mission, and the narrowest, e.g., a tactic for accomplishing a specific goal. Planning is concerned with the future impact of today's decisions. It is the fundamental function of management. The need for planning is often apparent after the fact. However, planning is easy to postpone in the shortrun. Postponement of planning especially plagues labor oriented, hands on managers. The organizing, staffing, leading and controlling functions stem from the planning function The manager is ready to organize and staff only after goals and plans to reach the goals are in place. Likewise, the leading function, influencing the behavior of people in the organization, depends on the goals to be achieved. Finally, in the controlling function, the determination of whether or not goals are being accomplished and standards met is based on the planning function. The planning function provides the goals and standards that drive the controlling function. 2. Organizing Organizing is establishing the internal organizational structure of the organization. The focus is on division, coordination, and control of tasks and the flow of information within the organization. It is in this function that managers distribute authority to job holders. 4
MBA Practice Manual

Introduction to Management Accounting

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Organizing is establishing the internal organizational structure of the business. The focus is on division, coordination, and control of tasks and the flow of information within the organization. Managers distribute responsibility and authority to job holders in this function of management. 3. Staffing Staffing is filling and keeping filled with qualified people all positions in the business. Recruiting, hiring, training, evaluating and compensating are the specific activities included in the function. In the family business, staffing includes all paid and unpaid positions held by family members including the owner/operators. The organizing function of management defines each position or category of positions. Staffing follows with the filling and keeping filled all positions. Recruiting a pool of applicants for a position, selecting new employees from among the pool of applicants, training new employees and retraining experienced employees are the key elements of the staffing function. Managing resignations and discharges is also part of staffing. Staffing may be mistakenly limited to regular employees. Instead, staffing includes all personnel categories: managers, working managers and laborers; family and non-family; paid and unpaid; and full-time and part-time. Staffing success depends heavily on the planning and organizing functions of management. In planning, both business goals and employees' goals are considered. A business functions best when business and employee goals are compatible. Job analysis leads to job specifications and job descriptions. In developing job specifications, the necessary knowledge, skills and abilities for each position are determined. Job descriptions identify specific tasks for each position. 4. Leading An organization has the greatest chance of being successful when all of the employees work toward achieving its goals. Since leadership involves the exercise of influence by one person over others, the quality of leadership exhibited by supervisors is a critical determinant of organizational success. Thus, supervisors / managers study leadership in order to influence the actions of employees toward the achievement of the goals of the organization. A traditional definition of leadership: Leadership is an interpersonal influence directed toward the achievement of a goal or goals. Three important parts of this definition are the terms interpersonal, influence, and goal.
MBA Practice Manual

Introduction to Management Accounting

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Interpersonal means between persons. Thus, a leader has more than one person (group) to lead. Influence is the power to affect others. Goal is the end one strives to attain.

Basically, this traditional definition of leadership says that a leader influences more than one person toward a goal. Leadership is a dynamic relationship based on mutual influence and common purpose between leaders and collaborators in which both are moved to higher levels of motivation and moral development as they affect real, intended change. Three important parts of this definition are the terms relationship, mutual, and collaborators. Relationship is the connection between people. Mutual means shared in common. Collaborators cooperate or work together. This definition of leadership says that the leader is influenced by the collaborators while they work together to achieve an important goal. 5. Controlling Controlling is a four-step process of establishing performance standards based on the firm's objectives, measuring and reporting actual performance, comparing the two, and taking corrective or preventive action as necessary. Performance standards come from the planning function. No matter how difficult, standards should be established for every important task. Although the temptation may be great, lowering standards to what has been attained is not a solution to performance problems. On the other hand, a manager does need to lower standards when they are found to be unattainable due to resource limitations and factors external to the business. Corrective action is necessary when performance is below standards. If performance is anticipated to be below standards, preventive action must be taken to ensure that the problem does not recur. If performance is greater than or equal to standards, it is useful to reinforce behaviors that led to the acceptable performance.

MBA Practice Manual

Introduction to Management Accounting

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Difference between Management Accounting and Financial Accounting:

No. 1 2

Basis Difference

of Management Accounting
Internal users It is not subject to the requirements of generally accepted accounting principles. In management accounting information may be financial or non-financial and may be much more subjective in nature Although management accounting also records and reports events that have already occurred, there is also a very strong emphasis on providing information about future events. Management accounting provides measures and internal reports used to evaluate the performance of entities, product lines, departments, and managers. Essentially very detailed information is needed and provided. Management accounting is much broader than financial accounting. It includes aspects of managerial economics, industrial engineering, and management science, as well as numerous other areas.

Financial Accounting External users The inputs and processes of financial accounting are well defined and in fact, restricted. The restriction imposed by financial accounting tend to produce objective and verifiable financial information. Financial accounting has an historical orientation. It records and reports events that have already happened.

Users Restriction on inputs and processes

Types of information

Timing

Performance

Financial accounting focuses on overall firm performance, providing a more aggregated viewpoint.

Breadth

Financial account is less broader as compared to management accounting.

MBA Practice Manual

Introduction to Management Accounting

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ETHICS IN MANAGEMENT ACCOUNTING FIELD In today's modern world of business, individuals in management accounting and financial management constantly face ethical dilemmas. For example, if the accountant's immediate superior instructs the accountant to record the physical inventory at its original costs when it is obvious that the inventory has a reduced value due to obsolescence, what should the accountant do? To help make such a decision, here is a brief general discussion of ethics and the "Standards of Ethical Conduct for Members." Ethics, in its broader sense, deals with human conduct in relation to what is morally good and bad, right and wrong. To determine whether a decision is good or bad, the decision-maker must compare his/her options with some standard of perfection. This standard of perfection is not a statement of static position but requires the decision-maker to assess the situation and the values of the parties affected by the decision. The decision-maker must then estimate the outcome of the decision and be responsible for its results. Two good questions to ask when faced with an ethical dilemma are, "Will my actions be fair and just to all parties affected?" and "Would I be pleased to have my closest friends learn of my actions?" Individuals in management accounting and financial management have a unique set of circumstances relating to their employment. To help them assess their situation, the Institute of Management Accountants (IMA) has developed the following "Standards of Ethical Conduct for Members." STANDARDS OF ETHICAL CONDUCT FOR MEMBERS Members of IMA have an obligation to the public, their profession, the organizations they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the IMA has promulgated the following standards of ethical conduct for its members. Members shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others within their organizations. Members shall abide by the more stringent code of ethical conduct, whether that is the standards widely practiced in their country or IMAs Standards of Ethical Conduct. In no case will a member conduct herself or himself by any standard that is not at least equivalent to the standards identified for members in IMAs Standards of Ethical Conduct. The standards of ethical conduct for IMA members are published in SMA 1C (Statement on Management Accounting).

MBA Practice Manual

Introduction to Management Accounting

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COMPETENCE Members have a responsibility to: Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. Perform their professional duties in accordance with relevant laws, regulations, and technical standards. Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

CONFIDENTIALITY Members have a responsibility to: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality. Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

INTEGRITY Members have a responsibility to: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically. Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. Refrain from either actively or passively subverting the attainment of the organization's legitimate and ethical objectives. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Communicate unfavorable as well as favorable information and professional judgements or opinions.

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Refrain from engaging in or supporting any activity that would discredit the profession.

OBJECTIVITY Members have a responsibility to: Communicate information fairly and objectively. Disclose fully all-relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented.

RESOLUTION OF ETHICAL CONFLICT In applying the standards of ethical conduct, members may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, members should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such members should consider the following courses of action. 1. Discuss such problems with the immediate superior except when it appears that the superior is involved, in which case the problem should be presented initially to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issues to the next higher managerial level. If the immediate superior is the chief executive officer, or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with the superior's knowledge, assuming the superior is not involved. Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate. 2. Clarify relevant ethical issues by confidential discussion with an objective advisor (e.g., IMA Ethics Counseling service) to obtain a better understanding of possible courses of action. - Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

If the ethical conflict still exits after exhausting all levels of internal review, there may be no other recourse on significant matters than to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization. After resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties. 10
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Introduction to Management Accounting

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MULTIPLE CHOICE QUESTIONS 1. The IMAs Standards of Ethical conduct for Practitioners of Management Accounting and Financial Accounting includes which of the following broad categories? (a) (b) (c) (d) 2. (a) (b) (c) (d) 3. Competence. Confidentiality. Integrity. All of the above Planning. Directing and motivating. Controlling. All of the above.

Which major activities do managers carry out?

Which one of the following is not the role of cost and management accountant; (a) (b) (c) (d) (e) Providing information Measuring performance Motivating employees None of above All of above

4.

Which of the following is not true? (a) (b) (c) (d) (e) Managerial accounting need not conform to GAAP Financial accounting reports focus on subunits of the organization Managerial accounting is not required Financial accounting is required Managerial accounting focuses on the needs of internal users

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Introduction to Management Accounting

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5.

Which of the following is true? (a) (b) (c) (d) (e) Most services are inventoried as they are produced. Service industries tend not to be labor intensive. Managerial accounting techniques apply to service industries. A multinational firm has subunits in only one country. All the above are true

6.

Under which ethical standard of conduct does the managerial accountant have the responsibility to refuse any gift, favor, or hospitality that would influence or appear to influence his or her decision? (a) (b) (c) (d) (e) Competence Confidentiality Integrity Objectivity All of the above

7.

Under which ethical standard of conduct does the managerial accountant have the responsibility to refrain from either actively or passively subverting the attainment of organization's legitimate and ethical objectives? (a) (b) (c) (d) (e) Competence Confidentiality Integrity Objectivity All of the above

8.

Under which ethical standard of conduct does the managerial accountant have the responsibility to refrain from engaging in or supporting any activity that would discredit the profession? (a) (b) (c) (d) (e) Competence Confidentiality Integrity Objectivity All of the above 13

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Introduction to Management Accounting

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9.

Under which ethical standard of conduct does the managerial accountant have the responsibility to disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented? (a) (b) (c) (d) (e) Competence Confidentiality Integrity Objectivity All of the above

10.

Managerial accounting activity adds value to an organization by pursuing five major objectives, which include: (a) (b) (c) (d) Providing information for decision making and planning. Assisting managers in directing and controlling operational activities. Measuring the performance of activities within an organization. Providing information for external users of financial reports.

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Introduction to Management Accounting

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TRUE / FALSE
1.

Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an organization's goals. Planning generally involves developing a detailed financial and operational description of anticipated operations. Controlling involves surveillance of personnel and monitoring their activities. Empowerment refers to the management accountant's responsibility relative to controlling personnel behavior. Financial accounting and managerial accounting rely on two separate accounting systems Managerial accounting is highly regulated Managerial accounting must accounting principles (GAAP). conform to generally accepted

2. 3. 4. 5. 6. 7. 8.

The expectation that a CMA will refuse any gift, favor, or hospitality that would influence or appear to influence his or her actions is found in the IMA ethical standard of integrity. The expectation that a CMA will perform professional duties in accordance with relevant laws, regulations, and technical standards is found in the IMA ethical standard of integrity. The expectation that a CMA will communicate information fairly and objectively is found in the IMA ethical standard of confidentiality.

9.

10.

No. 1 2 3 4 5

True / False

No 6 7 8 9 10

True / False

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